Letters of Credit Rules to Change July 1

On July 1, 2007, new rules regarding Letters of Credit become effective.  The new Uniform Customs and Practices for Documentary Credits (2007 Revision), referred to as UCP 600, will replace the 1993 revision known as the UCP 500.  U.S. banks issue billions in commercial letters of credit every year, thus performing a very important role in international trade.  Most of the commercial letters of credit are issued “subject to the UCP 500.”  The change to the new rules will therefore have a big impact on the policies and practices of banks that issue or accept Letters of Credit. 

The new rules will have many changes.  One important change is the establishment of an absolute five calendar day deadline to examine documents and pay or reject a draw.  The UCP 500 merely required the issuing bank to make a decision within a reasonable period of time.  Further, the UCC gives banks “a reasonable time, not to exceed seven business days.”  UCC § 5-108.  Banks must be aware of the new UCP 600 absolute five calendar day rule.

The UCP 600 makes other important changes, including new rules for determining the enforceability of issuer-proposed amendments, new rules regarding the addresses of applicants and beneficiaries, and new definitions of terms. 

Banks that issue or accept Letters of Credit should review the new rules before July 1, 2007, as the new rules may soon be deemed customary credit practice.  Furthermore, in light of the changes to the UCP, banks should evaluate their use of the UCP for standby Letters of Credit and consider if a change to ISP98 would be beneficial.